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2,600 | <s>[INST] First identify the problem Much [/INST] depends on what caused East Asia's crash. </s> |
2,601 | <s>[INST] One emphasises that the crisis [/INST] was homegrown, the product of crony "Asian capitalism". </s> |
2,602 | <s>[INST] The other emphasises panic It points out that no one foresaw the crisis; that by conventional indicators [/INST] of economic health (budget deficits and so forth) the Asian economies were in good shape; and that no economic change occurred in 1997 to justify such a massive loss of confidence. </s> |
2,603 | <s>[INST] There is probably some truth to both [/INST] interpretations, and most observers believe the crisis was a combination of the two. </s> |
2,604 | <s>[INST] Where analysts differ is [/INST] the relative weight they assign to each. </s> |
2,605 | <s>[INST] American triumphalists and some academics, [/INST] such as Paul Krugman, emphasise crony capitalism. </s> |
2,606 | <s>[INST] Others, notably Jeffrey Sachs of Harvard University and [/INST] Joseph Stiglitz, chief economist at the World Bank, believe panic was more important. </s> |
2,607 | <s>[INST] Crucially, these two interpretations imply different [/INST] conclusions about how best to prevent and deal with future crises. </s> |
2,608 | <s>[INST] If you regard Asia's crash essentially as a crisis of Asian [/INST] capitalism-especially its opacity, poor regulation and cronyism-then systemic reforms should be geared towards reinforcing transparency, improving supervision and limiting moral hazard. </s> |
2,609 | <s>[INST] But if the crisis was primarily one of panic, then [/INST] the goal should be to control unstable markets while providing more public money or creating new, reassuring rules. </s> |
2,610 | <s>[INST] Thailand's secret sales of foreign-exchange reserves in [/INST] the forward markets made a mockery of its official reserve levels. </s> |
2,611 | <s>[INST] No one had any idea [/INST] how enormous South Korea's short-term debt burden was. </s> |
2,612 | <s>[INST] This opacity worsened the crisis, suggesting global markets would [/INST] work better if there were more information, of better quality, on a broader range of economic items. </s> |
2,613 | <s>[INST] Since Mexico's crash in 1994-95 there [/INST] have been efforts to improve the information available to investors. </s> |
2,614 | <s>[INST] Only 39 countries post their [/INST] economic statistics on the IMf's new electronic bulletinboard. </s> |
2,615 | <s>[INST] Few countries (rich or poor) [/INST] publish details of their forward foreign-exchange operations. </s> |
2,616 | <s>[INST] Worse, much important information is [/INST] simply not collected, or collected too late. </s> |
2,617 | <s>[INST] Aggregated information on firms' foreign [/INST] indebtedness, for instance, simply does not exist. </s> |
2,618 | <s>[INST] Policing the banks A second [/INST] reform to reinforce capital markets is better regulation. </s> |
2,619 | <s>[INST] Banks are uniquely vulnerable institutions, [/INST] capable of wreaking havoc if inadequately supervised. </s> |
2,620 | <s>[INST] Countless banking crises-in rich and poor countries alike-have [/INST] shown that the combination of free capital flows and badly regulated banks is disastrous. </s> |
2,621 | <s>[INST] To improve supervision, the Basle Committee of [/INST] international bank supervisors issued "25 core principles" of sound banking last year. </s> |
2,622 | <s>[INST] For many observers, however, East [/INST] Asia's crisis shows that more needs to be done. </s> |
2,623 | <s>[INST] The key internationally-agreed rules for banks are [/INST] the Basle capital-adequacy standards set up by the industrialised countries in 1988. </s> |
2,624 | <s>[INST] The minimal capital necessary for safety in [/INST] a developed banking system may be insufficient in volatile emerging markets. </s> |
2,625 | <s>[INST] And it seems odd that lending shortterm to banks, [/INST] particularly emerging-market ones, is considered always less risky than making long-term loans to companies such as Microsoft. </s> |
2,626 | <s>[INST] Others go much further, arguing that a global [/INST] capital market needs global financial regulation, not a hotch-potch of national supervisors of varying quality. </s> |
2,627 | <s>[INST] Henry Kaufman, an American marketswatcher, [/INST] has put forward the most ambitious proposal. </s> |
2,628 | <s>[INST] He wants to create a new [/INST] international institution that would supervise participants in global capital markets. </s> |
2,629 | <s>[INST] It would establish uniform trading, reporting and disclosure requirements, [/INST] set minimum capital requirements and eventually rate the credit quality of institutions under its jurisdiction. </s> |
2,630 | <s>[INST] Stanley Fischer, deputy managing director of the IMF, is [/INST] wary of creating a new institution but keen on more systematic supervision of existing regulators. </s> |
2,631 | <s>[INST] Cut moral hazard A third [/INST] market-reinforcing reform is to reduce moral hazard. </s> |
2,632 | <s>[INST] For many conservatives, particularly in America's [/INST] Congress, the answer is to curb, or even eliminate, the IMF. </s> |
2,633 | <s>[INST] It is the prospect of bail-outs, [/INST] they argue, that encourages governments to profligacy and investors to recklessness. </s> |
2,634 | <s>[INST] They argue that governments can [/INST] protect themselves privately against sudden flights of capital. </s> |
2,635 | <s>[INST] In 1995, Argentina faced a liquidity [/INST] crisis, as capital fled in the aftermath of Mexico's crash. </s> |
2,636 | <s>[INST] To avoid a repeat, the Argentines entered [/INST] into $6.7 billion worth of "reverse repo" arrangements with 14 international banks. </s> |
2,637 | <s>[INST] For promising to provide liquidity should capital suddenly [/INST] flee, the banks charge Argentina a fee and demand Argentine bonds as collateral. </s> |
2,638 | <s>[INST] Many reformers think this approach [/INST] is the best way to avoid liquidity crises. </s> |
2,639 | <s>[INST] Some argue that public [/INST] monev can bolster such private liquidity lines. </s> |
2,640 | <s>[INST] The Argentines, for instance, have suggested that [/INST] international institutions could give guarantees in place of the collateral banks now demand. </s> |
2,641 | <s>[INST] Ricardo Hausmann, chief economist at the InterAmerican Development Bank, [/INST] wants international institutions to promote this market by offering countries such liquidity lines jointly with commercial banks. </s> |
2,642 | <s>[INST] This way, public money helps boost liquidity [/INST] without worsening moral hazard, and private creditors cannot simply flee when panic hits. </s> |
2,643 | <s>[INST] If credit lines could preempt crises [/INST] of illiquidity, that still leaves the problem of insolvency. </s> |
2,644 | <s>[INST] Or, put another way, the question [/INST] of how Asia's mess should have been dealt with. </s> |
2,645 | <s>[INST] Again, the most orthodox free-market types would say that South [/INST] Korean, Thai and Indonesian banks and firms should simply have defaulted, making foreign bankers and other investors lose money. </s> |
2,646 | <s>[INST] International default, however, is [/INST] thought to come at a heavy price. </s> |
2,647 | <s>[INST] Countries that reneged on their bonds in [/INST] the 1930s did not regain access to capital markets for decades. </s> |
2,648 | <s>[INST] This history has spawned a deepseated fear of formal [/INST] default (though many poor countries have had de facto defaults as their debts have been rescheduled). </s> |
2,649 | <s>[INST] Formal cross-border default seems frightening, for [/INST] it takes place in a legal and institutional vacuum. </s> |
2,650 | <s>[INST] Hence a further market-reinforcing reform aims to fill this void: [/INST] to find a way in which creditors can take a hit without the chaos of uncontrolled default. </s> |
2,651 | <s>[INST] He would like a fully-fledged international [/INST] bankruptcy framework, modelled on chapter it of the American bankruptcy law. </s> |
2,652 | <s>[INST] His proposals* would not only ensure that creditors took a [/INST] hit, but would also provide debtors with a framework within which they could gain access to new credit. </s> |
2,653 | <s>[INST] He claims that South Korea's "voluntary" [/INST] rescheduling of its short-term debts was the right approach. </s> |
2,654 | <s>[INST] They argue that a generous international bankruptcy procedure [/INST] would worsen the problems of moral hazard, as default became an easy option. </s> |
2,655 | <s>[INST] In official circles the idea of [/INST] such "orderly work-outs" was carefully studied after Mexico's 1995 crisis. </s> |
2,656 | <s>[INST] The conclusion was that the [/INST] legal problems surrounding a world bankrupt court were insurmountable. </s> |
2,657 | <s>[INST] But more modest reforms were suggested: including "default clauses" which stipulated a [/INST] work-out procedure in future bond contracts, and allowing the IMF to lend to countries that had defaulted, thereby implicitly sanctioning a default. </s> |
2,658 | <s>[INST] Not only are there two main types of [/INST] creditors (banks and bondholders), but also several kinds of debtors (sovereign governments, banks and firms). </s> |
2,659 | <s>[INST] A "work-out" system that reinforced, rather than undermined, market [/INST] discipline must be sufficiently systematic to prevent chaos, but tough enough to avoid moral hazard. </s> |
2,660 | <s>[INST] Or channel the flows For those who see [/INST] East Asia's crisis primarily as one of panic, these market-reinforcing reforms mostly miss the point. </s> |
2,661 | <s>[INST] Far more urgent is the [/INST] need to control the capital flows themselves. </s> |
2,662 | <s>[INST] Ironically, the most ambitious of such proposals is [/INST] touted by George Soros, a man who made his fortune and reputation in financial markets. </s> |
2,663 | <s>[INST] He now believes the private sector is [/INST] ill-suited to allocating international credit and thinks bureaucrats would do a better job. </s> |
2,664 | <s>[INST] This bureaucracy would, for a modest fee, guarantee [/INST] all international loans to a country up to a debt level it deemed appropriate. </s> |
2,665 | <s>[INST] This proposal has so many weaknesses [/INST] it is hard to believe anyone takes it seriously. </s> |
2,666 | <s>[INST] Blanket insurance up to a cut-off point would [/INST] precipitate a rush to lend up to a country's limit (with commensurately bad investment decisions). </s> |
2,667 | <s>[INST] And there is no evidence that bureaucrats [/INST] are any better at determining optimal debt levels than the market. </s> |
2,668 | <s>[INST] Think only of the marvellous [/INST] job they did in the former Soviet Union. </s> |
2,669 | <s>[INST] While most policymakers consider Mr Soros's ideas [/INST] crazy, a far broader consensus surrounds the usefulness of capital controls. </s> |
2,670 | <s>[INST] For those who are uneasy with the speed with which [/INST] funds flow around the globe, the perennial idea of a tax on currency transactions has surfaced again. </s> |
2,671 | <s>[INST] Even more popular is the [/INST] idea of "prudential" capital controls on short-term inflows. </s> |
2,672 | <s>[INST] He likes to compare global capital markets to [/INST] a wild and choppy sea: small economies, like small boats, can easily sink. </s> |
2,673 | <s>[INST] Chile is often cited as an [/INST] example of a country that has flourished using such controls. </s> |
2,674 | <s>[INST] It discourages hot money by demanding that 30% [/INST] of all inflows be deposited without interest at the central bank for one year. </s> |
2,675 | <s>[INST] Chile's real interest rates are higher than they need be, [/INST] and its financial markets are segmented: big firms borrow abroad; small ones face high rates at home. </s> |
2,676 | <s>[INST] While less hot money might reduce the [/INST] risks of a market panic, it would not eliminate it entirely. </s> |
2,677 | <s>[INST] Hence a further reform option is [/INST] to create a true global lender of last resort. </s> |
2,678 | <s>[INST] The IMF partially fulfills the role but compared with a central [/INST] bank (the domestic lender of last resort), it is severely constrained: it cannot print money and so cannot lend freely. </s> |
2,679 | <s>[INST] It does not lend at penal interest rates [/INST] (though it attaches exacting conditions to its money) and does not demand collateral. </s> |
2,680 | <s>[INST] In serious crises, the IMF [/INST] has not been the main lender of last resort. </s> |
2,681 | <s>[INST] In 1982, when Mexico teetered on the edge of [/INST] default, it was the United States that stepped in, prepaying for $2 billion of Mexican oil. </s> |
2,682 | <s>[INST] When Mexico hit trouble in 1995, it [/INST] was again the Americans that provided most of the instant money. </s> |
2,683 | <s>[INST] And, for all the talk of "huge [/INST] IMF bailouts" in East Asia, only modest sums have been lent. </s> |
2,684 | <s>[INST] Recent reforms have made the [/INST] IMF more like a lender of last resort. </s> |
2,685 | <s>[INST] A new credit facility allows countries in trouble [/INST] to borrow more money, quickly, at penal interest rates (but still with economic conditions attached). </s> |
2,686 | <s>[INST] But even with a capital increase, [/INST] the IMF will have only another $90 billion in its kitty. </s> |
2,687 | <s>[INST] To be a credible lender [/INST] of last resort would demand much more. </s> |
2,688 | <s>[INST] With such an array of possible reforms, [/INST] it is hardly surprising that international officials are confused and uncertain. </s> |
2,689 | <s>[INST] Their political masters demand quick [/INST] action, to show they have "dealt with" Asia's crisis. </s> |
2,690 | <s>[INST] A few reforms are easy, obvious [/INST] and make sense whatever interpretation of Asia's crisis you hold. </s> |
2,691 | <s>[INST] A second category of possible [/INST] reforms also make sense, but will be politically difficult. </s> |
2,692 | <s>[INST] Creating a truly global overseer [/INST] of regulators will be vehemently resisted by national bodies. </s> |
2,693 | <s>[INST] Imagine America's Securities and Exchange Commission, [/INST] for instance, being dictated to by some supranational body. </s> |
2,694 | <s>[INST] Similarly, attempts to change capital-adequacy standards or [/INST] broaden the reach of supervision beyond banks will all take a long time. </s> |
2,695 | <s>[INST] The Basle capital-adequacy standards took [/INST] the best part of a decade to evolve. </s> |
2,696 | <s>[INST] But most difficult-conceptually, politically and practically-is the [/INST] question of minimising moral hazard versus creating a better lender of last resort. </s> |
2,697 | <s>[INST] Or, put another way, the dilemma of ensuring that private [/INST] investors pay the price of their bad decisions, but that countries are not unfairly punished for investor panics. </s> |
2,698 | <s>[INST] Theoretically, the logic of a vast [/INST] international lender of last resort to cope with panics is impeccable. </s> |
2,699 | <s>[INST] In practice, it is difficult [/INST] to distinguish between unwarranted panic and real problems. </s> |
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